Bursting Of Financial Carbon Bubble Could Cost Investors $6 Trillion

As much as $6 trillion in fossil fuel investments could be at risk over the coming decade, if international climate agreements and significant action on climate change proceed, according to new research by the Carbon Tracker initiative and the Grantham Research Institute.

Under the 2010 Cancun Accord, governments have committed to curb global greenhouse gas emissions to try and keep a continuing rise in global temperature to under 2°C. Most climate scientists agree that above this level, the world would be in for a dangerous level of sea level rise and increasingly extreme weather, amongst other dangerous effects.

A big part of the current fossil fuel investment issue is that known fossil fuel reserves already far surpass the allowable carbon budget needed to meet that goal of keeping under 2°C. World financial markets are still basing current fossil fuel investment valuations on the assumption that all of the known reserves will be burned, and that emissions will continue to rise substantially, rather than stabilize and then fall. It’s not hard to see what could happen to the value of those assets if and when the world faces up to the reality of now having to reduce greenhouse gas emissions quickly.

The new research found that companies had invested $674 billion last year alone in searching for and developing fossil fuel assets that will have to be left in the ground, if significant action to address emissions proceeds. Investors have been cautioned from continuing to have a stake in these carbon intensive assets.

A study of 200 listed companies found that 762 billion tonnes on CO2 is owned through reserves of fossil fuels, with share valuations of about $4 trillion, and with $1.5 trillion in outstanding corporate debt. If the companies in question end up having to comply with a necessary carbon budget of 125-273 billion tonnes of CO2, as much as three-quarters of the currently owned reserves will have to be left unburned.

As the years roll on, it’s not difficult to see that the future of many of these companies and funds heavily invested in fossil fuel reserves could be shaky indeed. In this case, do you think there will be an orderly exist to low carbon assets – a smooth deflation of the carbon bubble – or will the bubble burst?